American Decline and the End of Hegemony

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AMERICAN DECLINE AND THE END OF HEGEMONY W. Max Corden It is common to take a very pessimistic view of the U.S. economy both in an absolute sense and when comparing American economic performance relative to other countries, especially Japan. It is said that U.S. industry has been losing competitiveness in world markets, and that U.S. productivity growth—hampered by low investment, poor educational standards, and so on—has slackened severely, to the point where the United States may be entering an era of decline. In addition, growing foreign indebtedness threatens the future standard ofliving ofthe people of the United States, making the economy vulnerable to a withdrawal of foreign credits leading to a major recession (the "hard landing" scenario) and, perhaps most important of all, endangers the leadership or "hegemonic " position of the United States—an effect that threatens the openness and stability of the world economy.1 1. An interesting discussion of the "America in decline" issue in historical perspective (with many examples) is in Charles P. Kindleberger, "America in Decline? Possible Parallels and Consequences", Working Paper 89-7, Georgetown University Department of Economics, April 1989. W. Max Corden is professor of international economics at SAIS. From 1986 to 1988, he was a senior advisor to the International Monetary Fund. He is the author of Inflation, Exchange Rates, and the World Economy (Chicago: University of Chicago Press, 1986). He wishes to thank Isaiah Frank and Richard Pomfret for helpful comments on an earlier draft. 13 14 SAIS REVIEW Finally, a weakening ofthe U.S. economic position would clearly have adverse implications for its international political influence and for its ability to exercise military power. Carried further, this view suggests that we are in the midst of a historic transition from a world economy dominated by the United States to one which might suffer through being "leaderless" or, alternatively, one dominated by a group of countries including the United States, or even one dominated by Japan. In answer to these concerns, it has to be admitted that there are indeed problems, especially those connected with the budget and currentaccount deficits which are turning the United States into a net debtor in the world. Furthermore, the relative position of the United States in the world economy has declined and is likely to continue declining. These aspects will be discussed further below. Yet one could also take a much more positive view, bearing in mind a few facts. Neither extreme pessimism nor an attitude of neglect toward some of the problems seems justified. The Case for Optimism The consistently high growth rates achieved by the industrial countries (the OECD countries) up to 1973 were quite remarkable, and the 1953-1973 era will go down in history, along with the era 1896-1913, as a period ofoutstanding economic success. Regrettably, the 1953-73 boom culminated in an inflationary explosion followed by a recession brought about by tight monetary policies and the first oil shock. All this created great uncertainty. In all countries productivity growth rates declined after 1973 and the question arose whether it was possible to maintain high levels of employment and capacity utilization while avoiding severe and possibly accelerating inflation. The 1970s thus proved to be a time when pessimism seemed justified. For a short period, 1976-79, during the Carter administration, the United States stood out by maintaining higher growth rates of employment and levels of capacity utilization than the other OECD countries, notably European countries. But this was at the cost of increasing inflation, which was higher than in other major countries. This episode seemed to confirm widespread doubts about the ability ofgovernments to stimulate the economy to absorb a growing labor force while avoiding inflation. The recession of 1980-82—the biggest recession in the postwar period—was the direct result of tight monetary policies imposed to reduce inflation. In 1983 the U.S. and other OECD economies started to recover and there has now been continuous, positive, and quite high growth for seven years. Growth rates are not back at the levels ofthe 1953-73 period, but THE END OF HEGEMONY 15 the recent trend is surely something that can be viewed with...

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